(8) Non-current assets Flashcards
What are PPE assets?
PPE assets are tangible items that:
i. are held for use in the production or supply of goods/services, for rental, for administrative purposes, and,
ii. are expected to be used during more than one period
What are PPE assets initially recorded at?
At cost - the amount of cash / cash equivalents paid or the fair value of the other consideration given to acquire the asset
What is fair value?
The price that would be
received to sell an asset or paid to transfer
a liability in an orderly transaction between
market participants at the measurement
date
What does the cost of an asset consists of?
The cost consists of the fair value of all expenditures necessary to,
1) acquire the asset and,
2) make it ready for its intended use
Costs includes:
- purchase price
- freight cost
- insurance during transit
- installation costs
- settlement costs
- stamp duty
- accrued property taxes assumed (paid) by purchaser
Example: Cost of land includes
- Cash price of property
- Demolition/removal cost of warehouse
- Solicitor’s fee for land purchase
- Stamp duty on property
- Land taxes owing from last financial period
NOT INCLUDED: building of new fences on property –> this goes under Land Improvements (asset account)
Define depreciation
Depreciation is the process of allocating to expense the cost of a PPE asset over its useful (service) life in a rational and systematic manner
Carrying amount formula
Carrying amount = cost - accumulated depreciation
4 factors that contribute to the decline in economic benefit of a depreciable asset
- Usage of the asset
- Physical wear and tear
- Technical and commercial obsolescence
- Legal life (e.g. expiry dates of related leases)
Straight-line depreciation method
When the useful life is the period over which an asset is expected to be available for use by an entity
Formula:
depreciation = (cost - residual value) / useful life
Diminishing balance depreciation method
When the useful life is the period over which an asset is expected to be available for use by an entity
- Usefulness decreases each year
- Depreciation expense decreases each year as greater benefits are consumed earlier in the asset’s life
Formula:
depreciation = carrying amount * depreciation rate
*depreciation rate = 1 - [(residual_value / cost) ^ (1/useful life)]
Depreciable amount is
Cost less residual
Units of production method
Useful life is expressed in terms of total units of production or use expected from the asset
Depreciation cost per unit = depreciable amount / useful life (in units)
Depreciation expense = depreciation cost per unit * yearly units of production
During the useful life of an asset, a firm may
incur costs for a) ordinary repairs, b) additions and improvements. Explain a) and b).
Ordinary repairs – expense
- expenses in maintaining operating efficiency of the asset
- expensed in operating statement
Additions and improvements – capitalise
- costs incurred to increase operating efficiency, productive capacity or useful life
- expenditure capitalised and depreciated over asset’s remaining useful life
Disposals of PPE assets include
- Sale
- Scrapping
- Exchange
How to record disposal of PPE assets?
Step 1: Update depreciation to date of disposal
Step 2: Calculate gain (or loss) on disposal
Step 3: Record the disposal of the asset
Format for calculating gain (or loss) on disposal
Cost of office furniture Less: Accumulated depreciation Carrying amount Proceeds from sale Gain (or loss) on disposal of asset
- gain (or loss) = proceeds - carrying amount
Journal entry for gain on disposal of asset
- Update depreciation expense
DR Depreciation expense
CR Accumulated depreciation
2. Gain on sale
DR Cash at bank
DR Accumulated depreciation
CR Gain on sale
CR Cost of PPE
Journal entry for loss on disposal of asset
- Update depreciation expense
DR Depreciation expense
CR Accumulated depreciation
2. Gain on sale
DR Cash at bank
DR Accumulated depreciation
DR Loss on sale
CR Cost of PPE
Journal entry for scrapping of asset when carrying amount = 0
- Update depreciation expense
DR Depreciation expense
CR Accumulated depreciation - Record scrapping
DR Accumulated depreciation
CR Cost of PPE
Journal entry for scrapping of asset when carrying amount > 0
- Update depreciation expense
DR Depreciation expense
CR Accumulated depreciation - Record scrapping
DR Accumulated depreciation
DR Loss on scrapping
CR Cost of PPE
PPE records
- A detailed asset register maintained
as an internal control procedure to
protect and efficiently manage the
PPE - Subsidiary ledgers are maintained to
keep details of individual assets
Classification of non-current assets (3 categories)
- Property, plant and equipment
- Intangibles
- Agricultural or Biological
Average useful life of PPE assets
Too high an estimated useful life will result in understating depreciation expense and overstating profit
Average age of PPE assets
A high average age relative to competitors might suggest that the entity’s assets are not as efficient, or that they may be in need of replacement
